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Oct 8, 2018

Markets By Amrith Ramkumar I The Wall Street Journal.

Markets

Happy Columbus Day. I'm Amrith Ramkumar, preparing you for the upcoming
week in financial markets. Bond markets are closed today but the stock
market is open.

This week, we'll be watching the latest signals on inflation and interest rates, after a surge in Treasury yields hurt
stocks and other risky assets Thursday and Friday. Following a mixed
jobs report Friday, expect investors to pay especially close attention
to producer-price and consumer-price figures later in the week.

Traders Set Signs on $100 Oil

A hot streak in the oil market is setting off a wave of bets on how high prices can go.

With crude prices rallying for four straight weeks of gains, trading of
oil options—contracts that give the right but not the obligation to buy
or sell—has surged.

The number of bullish contracts that pay out if Brent futures
surpass $100 a barrel by January—19% from its current level—has more
than doubled since the beginning of September, data from Intercontinental Exchange analyzed by QuikStrike show.

Shrinking supplies from Iran, along with strong global growth, has fired up bullish sentiment in the oil market. Uncertainty
over how much politically troubled OPEC countries can pump to make up
for production shortfalls could propel prices to $100, analysts and
officials in the group say.

Brent, the benchmark for global crude prices, has soared 26% this year
to $84.16, while West Texas Intermediate, the reference price for U.S.
crude, has risen 23% to $74.34.

Options tied to Brent prices hitting $95 have ramped up as well, more
than quadrupling since the start of September, the data show. Investors
have also turned to bullish options on oil exchange-traded funds and
shares of energy companies.

Some investors have preferred wagering on energy companies directly.
Options on U.S.-listed shares of Brazilian oil giant Petróleo
Brasileiro SA have seen a flurry of bullish activity in recent days. The
stock has already rallied 35% this year to $13.91 Friday as investors
anticipate the company will benefit from rising oil prices.

Petrobras also recently settled
corruption probes in Brazil and the U.S., concluding a multi-year
investigation. Brazil has an election this week, and the two leading
candidates have starkly different economic agendas that could affect
state-run Petrobras.

One trader put on a mammoth bet this week, buying bullish options tied
to Petrobas stock hitting $16 by January, a 15% gain from its current
level, according to BMO Capital Markets.

Investors who missed the energy rally are now eyeing bullish options to
capture any additional gains, said Chris Kettenmann, chief energy
strategist at New York-based brokerage Macro Risk Advisors.

“The market is considering $100 oil for the first time in five years,” he said.

Market Facts

The Nasdaq Composite and Russell 2000 each had their worst week since
March 23 last week, and the Dow Jones Industrial Average and S&P 500
posted their worst two-week stretch since June, according to Dow Jones
Market Data.

Even as U.S. crude prices hit their first multiyear high since June,
hedge funds and other speculative investors reduced net bullish bets on
oil for the fourth consecutive week during the week ended Tuesday. Net
bets on higher Brent crude prices also fell during the week ended Oct.
2, after previously climbing in five consecutive weeks.

On this day in 2008, in the depths of the financial crisis, the world's central banks launched a coordinated attack
against the widening global financial crisis, lowering short-term rates
in unison by a half-percentage point. The Dow lost 189 points.

Key Events

The federal government and U.S. bond markets are closed in observance of Columbus Day.

The International Monetary Fund releases its flagship forecasts for global economic growth
at 9 p.m. ET. Look for a downgrade to global growth from rising
protectionism and turmoil in emerging markets. The IMF and World Bank
annual meetings kick into high gear on Thursday in Bali, Indonesia.

Must Reads

A strong economy is generally good for stocks. But if yields continue
to march higher, investors may start to pull back from riskier assets
since they are being better compensated for holding risk-free ones.
PHOTO: SETH WENIG/ASSOCIATED PRESS

Surging yields raise the threat of a tipping point for stocks. Yields on long-term U.S. government debt moved abruptly higher last week, calling into question the durability of the more than nine-year-old bull market for stocks.

Small-stock managers are still topping the charts. The
Wall Street Journal Winners’ Circle rankings looks at actively managed
U.S. stock funds that have at least $50 million in assets and a record
of at least three years to highlight the fund with the best performance.

U.S. stock funds rose 5.2% in the third quarter. With three months to go, investors still have a shot at double-digit annual gains.

The price of financial advice is, finally, falling. As the rest of Wall Street cuts all kinds of fees in a race to zero, advisers have been the exception. That is starting to change.

A marijuana ETF is in the right spot. As marijuana-related stocks rally, the only U.S.-listed ETF focused on the industry has surged in recent weeks.

Investment in infrastructure is booming. Private-equity firms are on track to raise a record amount for infrastructure investing
in 2018, as money managers bet on the growing need to upgrade and
expand the world’s railroads, natural-gas pipelines and data centers.

What We've Heard on the Street

“The prospect of higher rates and an ensuing slowdown in growth are
hardly a welcome thing to investors. But the alternative of the Fed
letting the job market continue to rip could be even worse.”

Stocks to Watch

Netflix:
The video-streaming giant is among stocks that investors will be
keeping a close eye on Monday after technology shares weighed on the
Nasdaq Composite Friday, marking the index's worst week since March.

Home Depot: Shares of home builders and building-supply companies have come under pressure recently amid a surge in bond yields.

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